American Eagle Outfitters stock (NYSE: AEO) plunged more than 11% in premarket trading on Thursday despite an earnings beat that looked difficult to fault.
The retailer reported second-quarter earnings of 79 cents a share, crushing Wall Street expectations of about 22 cents, while revenue rose 8% to $1.38 billion and edged past the $1.37 billion consensus.
Yet beneath those headline numbers, investors found several reasons for caution.
Comparable sales missed expectations, the flagship American Eagle brand remained in decline and much of the profit improvement came from a one-off tariff refund rather than stronger underlying margins.
The earnings beat was not as clean as it looked
American Eagle’s gross profit jumped 34% to $672 million, while gross margin expanded 980 basis points to 48.7%.
But those figures were heavily influenced by tariff refunds.
The company booked a $179 million tariff-refund benefit in gross profit, while the net benefit to operating income was about $161 million.
Operating profit consequently more than doubled to $211 million.
The company received about $196 million in total federal tariff refunds during the quarter, helping explain why earnings exceeded forecasts by such a wide margin.
The underlying merchandise picture was much weaker. Merchandise margin fell 330 basis points as American Eagle continued discounting older stock.
That makes the 79-cent EPS number a less useful indication of sustainable earnings power than the headline suggests.
Aerie is booming, but American Eagle is not
The second concern is the growing divergence between the company’s two major brands.
Aerie and OFFLINE revenue jumped 25%, while Aerie comparable sales climbed 19%.
American Eagle comparable sales, however, declined 1%. Total comparable sales rose 6%, missing the 6.7% increase analysts expected.
Inventory also remained elevated, leaving the retailer exposed to further markdowns as it clears merchandise that has fallen out of step with changing fashion trends.
That division was already worrying Wall Street before earnings.
BMO Capital initiated American Eagle with a Market Perform rating and $18 target this week.
Analysts described the investment case as effectively two different businesses: Aerie’s strong growth provides support, but persistent execution problems at American Eagle make it difficult to forecast a meaningful recovery in fiscal 2027 earnings.
Guidance gave investors little reason to overlook the risks
American Eagle raised its full-year operating-income forecast to between $540 million and $550 million, from $390 million to $410 million previously.
But for investors tracking the stock through investment apps, the headline increase warrants a closer look because the new range includes the tariff-refund benefit.
More importantly, management expects third-quarter gross margin to be roughly flat from a year earlier.
The company forecasts mid-to-high-single-digit comparable-sales growth in the third quarter, but investors appear more interested in whether that growth can translate into cleaner margins.
Analysts noted that markdowns on outdated inventory, particularly in women’s merchandise, continue to pressure profitability even as Aerie performs strongly.
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